1H24 adjusted net profit no less than Rmb425mn
　　ANE (Cayman) Inc (ANE) preannounced its 1H24 results, estimating that revenue rose 16% YoY to about Rmb5.28bn, gross profit grew about 58% YoY to around Rmb873mn, and adjusted net profit grew more than 80% YoY to no less than Rmb425mn. We estimate that in 2Q24, revenue was about Rmb2.9bn, up 17% YoY and 22% QoQ; gross profit was about Rmb490mn, up 45% YoY and 28% QoQ; gross margin was about 17%, up 3.3ppt YoY and 0.8ppt QoQ; and adjusted net profit grew more than 35% YoY and 3% QoQ to no less than Rmb216mn.
　　Adjusted net profit was in line with our expectations, while revenue and gross profit slightly beat our expectations, mainly due to resilient pricing, sound freight volume growth, and strong momentum for cost reduction.
　　Trends to watch
　　Freight volume rose despite headwinds, driving high revenue growth in 1H24. Economic data and road freight demand were weak in 2Q24: Retail sales of consumer goods excluding automobiles rose 3.3% YoY, and PMI averaged 49.8. The truckload freight traffic index fell 3.6% YoY. In 1Q24, the firm's freight volume and parcel volume rose 22% and 25% YoY, and we estimate its freight volume maintained rapid growth of nearly 20% YoY in 2Q24 despite headwinds.
　　The firm's network competitiveness in terms of costs and services is becoming more prominent; a healthy ecosystem attracts franchisees to join its network. Amid weak industry demand, the operations of low- tier franchisees and dedicated lines are under pressure, and some of them may turn to leading express delivery networks. Since May, ANE has introduced preferential policies for "3300" products, waiving special surcharges for parcels up to 300kg to attract small parcels and franchisees to join its network. According to incomplete statistics from the company's website, more than 260 franchisees from Henan, Anhui, Xizang and other regions have joined ANE’s network since May. Despite the scale expansion, the firm's revenue and gross margin maintained sound YoY　and QoQ growth, thanks to its favorable franchisee ecosystem and a healthy competitive environment in the industry.
　　We are upbeat on the growth potential of the network value of leading franchised express delivery companies. According to Yunlian Research, the combined market share of the top 10 companies in China's less-than-truckload (LTL) industry was less than 10% in 2023, and there are a large number of dedicated line and regional network companies. In recent years, industries such as furniture, home appliances, auto parts, and hardware have accelerated the transformation towards flat supply chain channels and penetration into lower-tier markets. As a result, the advantages of express delivery networks have become more prominent given its wide coverage. We believe that the firm will continue to leverage its line-haul network's scale and cost advantages to consolidate fragmented LTL logistics demand in the industry, leading the LTL market to become more efficient and concentrated.
　　Financials and valuation
　　Given the company's resilient pricing and stronger-than-expected gross profit growth, we raise our 2024 and 2025 adjusted net profit forecasts 6% and 6% to Rmb842mn and Rmb1.06bn, up 65% and 26% YoY. The current price is trading at 9.0x 2024e and 7.1x 2025e adjusted P/E. We maintain an OUTPERFORM rating. Based on our more optimistic expectations for potential consolidation of the express delivery industry, we raise our TP 18% to HK$10 (12.5x 2024e and 9.9x 2025e adjusted P/E), offering 38.9% upside.
　　Risks
　　Disappointing economic growth; intensifying price competition; disappointing cost control.